10 September 2015

A World of Peripheries

Greece’s predicament gave new meaning to the phrase “peripheral Eurozone” – concluded the analysis of Fitch, a leading rating agency. The Greek financial case is certainly extreme in its complexities but there have been other Eurozone members – the Irish, the Portuguese and the Spanish – experiencing dramatic economic events in recent years: economic prosperity first, followed by serious financial difficulties, necessitating international support schemes.

But are they really peripheral countries? It is not the geographic distance that counts. These nations, having joined the core countries, the founders of the European integration process in the post-World War II period, profited a lot from becoming Common Market members in consecutive enlargements, and registered fast economic growth in the 1980s and 1990s, experiencing high growth in consumption and booming real estate markets – before the fall, that is. Other peripheral nations acceded to the European core countries much later: Hungary and other former command economies joined the club in 2004, had a good time at first, before difficulties started to accumulate and erupt. The starting position of the South European and of the East Central European countries differed a lot, but there have been similarities too: socio-economic development turned out to be fast but uneven, sometimes ending in financial disorder. Not everything can be explained by the legacies of authoritarian regimes on the fringes of Europe: look at Iceland, not even a member of the European Union, a well-off country, still the very first that had to turn to Europe and the International Monetary Fund (IMF) for help in 2008 when the global financial difficulties started to take their toll among vulnerable countries. Vulnerability, uneven development, exposure to external forces – these are the common traits of the above cases, whatever their geographical characteristics.

The term “periphery” has had an interesting history. Back in the 1960s, a dichotomy of core (centre) versus periphery was in circulation in neo-Marxist and development literature, influenced by the books of Immanuel Wallerstein who defined World Capitalism as a structure consisting of a core and a periphery. The United States is a par excellence core power, utilising its military, political and economic might to shape global order, and by doing so, goes the argument, exploits the periphery. In contrast, third world countries, populous and underdeveloped, mainly because they had been exploited for a long time, belong to the periphery of our present global (and biased) market order. Now, there is no room here to discuss the merits and weaknesses of the core–periphery model of global capitalism; suffice it to note that the term “peripheral” was originally applied to non-industrialised countries and regions outside the set of advanced and powerful countries.

Then the term gained popularity in business and media, and it has been recently applied to economies otherwise too rich to qualify as emerging or too particular to qualify as developing countries. Iceland and Ireland are rich by global standards. Greece or any other member state of the EU can only be called peripheral strictly in a European context. Hungary, Poland and particularly Romania and Bulgaria belong to the least well-off parts of the EU, yet they are still among the sixty richest countries worldwide, measured by gross domestic product per capita, which is not bad, given that there are about two hundred nations on the globe.

However, the core–periphery model may be a useful concept as it underlines one important aspect of the global economic order: all participants share certain characteristics of a modern finance-driven market system, but as individual players they are far from being equal in their interrelations within this order. Some are in a position to shape the rules as members of the core, while others are on the receiving end, that is, on the periphery. Or on the semi-periphery, since there are huge differences in relative economic and political capabilities among those not in the core. Looking at events from Budapest, it is easy to see the applicability of the term “semi-periphery”: never in our history have we Magyars ever been part politically or otherwise of the very core of the day (say, not at the time of the Great Discoveries, nor when Holland and England gave birth to commercial capitalism, nor ever since). The psyche of a Central European is heavily influenced by the innate feeling of being secondary to richer and more influential Western neighbours – a fact that is a source of constant irritation when measuring your life conditions against their higher material standards. But we have never been part of the third world either, our society does not really understand its problems and conditions. Part of the explanation is the fact that East Central Europe was cut off from the core (the West) during the decades of Soviet domination after World War II. But even at that time the region remained relatively advanced in industrial terms: we had our own big socio-economic problems, different from those of post-colonial Asia, Africa and Latin America.

Life is richer than social theory. Defining the globe as consisting of a rich core and a big poor periphery, and a set of semi-peripheral states in between, was arguably over-simplistic before the Great Recession – but it is more so after 2008. Who suffered the deepest output decline during the latest financial crisis? Well, the US, the UK, Western Europe and its closely attached dependencies, such as Hungary or the Baltic states. And the fastest growing economies of the globe since the turn of the century? China, India, Indonesia, and several other late industrialisers, whose impressive output performances obviously led to increased aspirations in global politics too. Hence the emergence of the term BRIC (and later BRICS, BRIICS) referring to important global players: the above countries, plus Russia, Brazil, South Africa, and the formation of the Group of 20. The economic growth record of the BRIC countries in the early 2000s certainly was a defining moment in world economy as it heralded the coming end of Western superiority in economic terms. Military might and dominance in international forums is another matter.

The impressive economic performance of the BRIC group did not go unnoticed, particularly at the time of the Great Recession, with Western nations experiencing the worst contraction since the 1970s (others claim: since the 1930s). Analysts, strategy advisers, politicians kept wondering about the secrets of economic dynamism in former developing countries, and about the potential growth advantages of non- Western governmental and social models. Given their output performance and regained global aspirations, it is hard to call the BRIC group developing (read: underdeveloped) or peripheral (read: of secondary status in global order). Is Beijing, Shanghai, Delhi, Moscow or Rio de Janeiro really in the periphery?

A high growth rate, starting from a relatively low level of material development, would not turn any of these nations advanced overnight. Should their growth rate superiority over those of the present core countries be maintained indefinitely (a very big if), it would still take decades to reach and surpass the per capita income level of the core. Importantly, high growth rates do not automatically translate into general and equitable improvements in wealth and income conditions within the societies concerned. The embarrassing fact is that phenomenal GDP growth in mainland China has further increased material inequalities in a nominally egalitarian society. Russia’s fast growth period, which importantly coincided with high global commodity prices, added to already existing drastic income inequalities. A casual look at shopping malls in Moscow and St Petersburg, or a short state visit to China’s capital and to its booming coastal strip would not give the visitor a true picture of the general level of advancement of the mentioned societies. The reality is that the average GDP per capita in Russia is about half, and in China a quarter, respectively, of the European mean. Imperial capitals and special zones may look impressive, but inland China and non-central Russian provinces are, let us face it, rather backward.

Mind you, advanced countries are not at all homogeneous. Even smaller nations may face large regional inequalities. Take Hungary. While Budapest and the surrounding central region is reported to be above the European average in terms of GDP per capita (well, taken into account the lower domestic price level), southern and northern Hungary are among the poorest regions of the EU. Bigger countries are even more heterogeneous in socio-economic respects: there are distressed areas next to rich counties, booming cities close to pockets of poverty. Child poverty, run-down inner cities, backward rural areas exist as a matter of fact in advanced countries in spite of decades of social engineering efforts and costly welfare measures by democratic governments. Hence the above provocative title: there may not exist a core sensu stricto any more; all nations and regions are a sort of global periphery.

What became clear by the early 2000s was that the global power balance had gradually changed. This realisation led to the emergence of the G20, a group of select large countries, representing over half of the globe’s economic output and population. At that time it seemed that the BRIC countries would keep booming and gaining global output share at the expense of the rich West. Politicians in search of a role model have not failed to notice the growth superiority of the BRIC block – consisting of mostly managed economies and non-liberal political regimes.

But the golden years of the BRIC took place some time ago, and times have changed. As the title of the July 2015 World Economic Outlook of the IMF puts it: “Slower Growth in Emerging Markets, a Gradual Pickup in Advanced Economies”. The West is certainly doing now somewhat better in economic terms, particularly the US but Europe is also improving. At the same time former growth stars are entering into a phase of slower growth – a new phenomenon for them. China still reports an impressive seven per cent economic growth rate – although not all analysts would take official Chinese data at face value. The world notes however that the current Chinese growth rate is well below its recent trend. A relative slowdown does have consequences. First, it exposes risks to sustainability: during a very fast growth era, an economy tends to amass unused and unusable capacities, financed through borrowing. Communist-run China is no exception: the ratio of private debt to the GDP now exceeds 200 per cent, high even by advanced market economy standards. In the recent decade China has produced far too much capacity through over-investment in steel, manufacturing and building material sectors, and, in the process, it has built up the largest bad debt mountain in history. Its capital markets are also suspect. What goes up will come down: the composite index of shares on the Shanghai and Shenzhen exchanges fell by a third through June to August 2015 – following a 145% surge in the preceding 12 months.

These market news pieces may sound ephemeral, and they are. But there are longer term forces at work, too. Abundant research has established the existence of a certain “middle income trap”: economic growth in most of the middle income (i.e. successfully emerging) economies tends to slow down or even stop, meaning that the bulk of these countries are unable to join the rank of developed, high- income countries within the foreseeable future. These economies may get stuck at the level they have reached. The classical factors of rapid economic growth are progressively petering out: a cheap labour force and the copying of foreign technologies. This is an obvious challenge for China with its increasing domestic labour costs, and the emergence of a middle class that wishes to consume more and save less. This is all fine, moreover these tendencies seem to be unavoidable, but they will render the original growth model obsolete in a short time.

Russia is another case with its dependence on raw material extraction and export. A booming economy when international crude oil prices exceed $120 per barrel, and a struggling one when oil prices drop below $60. Russia may have left behind its chaotic Yeltsin period, and order is said to be restored – but a turnaround of the industry has yet to be accomplished: the Russian economy remains dependent on commodity revenues. Declining energy prices and Western sanctions led to a recession in 2015.

Brazil, the emerging superstar of Latin America a dozen years ago, is not only experiencing a slowdown: in 2015 it went into recession. South Africa is growing at about two per cent a year: hardly dynamic for a country at that income level. India, the “largest democracy of the world”, is growing steadily, but not spectacularly.

All in all, the shine of the BRIC (BRIICS) countries has mostly gone. This is not surprising: economic research would tell politicians to be careful with extrapolations of former economic trends.

There is another theme in development economics that should be understood by politicians in search of magic formulae of economic dynamism: the role of institutions such as the legal system as well as formal and informal guarantees of business integrity. This is a very important lesson for China, Russia and other similar regimes fraught with increasing social losses due to corruption. Their governments keep launching anti-corruption campaigns to reduce the high level of anti-social activities. But there is a catch here: the very system sets the rewards and constraints in a way to create a corrupt or crony-capitalist environment.

It is not only more innovation that would be needed for these middle income states to enter a higher income and development class, and thus move on from the global periphery in Wallerstein’s term, but a more equitable society and a more integer business milieu as well in which value creation matters more than the siphoning away of value created by others. Failed political campaigns have shown how hard it is to achieve this goal under the present conditions. There is thus a lesson for those who want to imitate “Asian tigers” and similar performance kings: there are rules and norms that work at a lower level of development but will not be supportive of modernisation elsewhere and at a higher level of personal and societal advancement.

Some final remarks. First, the above qualifications to the received wisdom on the seemingly unstoppable growth performance of the non-Western members of the G20 should not be interpreted as a gloomy scenario. In spite of the turbulences in the Chinese financial sector at the time of writing, and a recent loss of momentum in the other members of the BRICS bloc, save India, the decline may most probably prove to be of transitory nature. The countries concerned are destined, so to say, to increase their global share due to natural endowments and demographic factors, among other growth ingredients. In case of China and Russia, a further increase in global share would only restore or approximate their previous relative positions. The above warning only goes to show that earlier impressive performances are partly based on temporary factors, and past trends are unlikely to continue.

Second, peripheral status does exist but this status is not well captured by customary macroeconomic indicators such as real GDP growth or GDP per capita or trade balance. High output volume of a populous country is a poor indicator in itself. Remember that imperial China in the early 19th century had a higher share of global output than England – but the latter was an unquestioned core country and China was not. The ability to shape global rules and achieve national goals, whether through force or exercising soft power, depends on a variety of factors in addition to the GDP and the like. Preeminent among these explanatory factors are legal, cultural, political institutions that are harder to transfer or ship across nations than commodities and industrial goods.